Federal Reserve Beige Book: Tariff Pressures Raising Business Costs, Inflation May Accelerate

On July 17, the Federal Reserve released its latest Beige Book report, indicating that Americans increasingly believe that tariffs imposed by former President Trump are driving up business costs and may ultimately lead to higher consumer prices.

The Beige Book, published eight times a year prior to each Federal Open Market Committee (FOMC) meeting, compiles economic assessments and anecdotal insights from the 12 regional Federal Reserve Banks. The latest edition, prepared by the Federal Reserve Bank of Boston, includes data and observations collected through July 7.

Regarding inflation and expectations around interest rate cuts, the report confirmed that inflation is rising broadly across the country and may accelerate further. This provides empirical support for the Fed's current cautious and patient stance. The Beige Book noted that all 12 Federal Reserve districts reported price increases, with businesses widely citing cost pressures linked to tariffs, particularly for raw materials used in manufacturing and construction. While some firms have refrained from raising prices due to growing consumer price sensitivity, resulting in squeezed profit margins, many others have passed part of the cost increases onto consumers through higher prices or surcharges.

The report specifically highlighted that contacts across industries generally expect cost pressures to remain elevated over the coming months, increasing the likelihood of an accelerated rise in prices before the end of summer.

Earlier this week, U.S. core CPI for June rebounded to 2.9%. Although slightly below expectations, it did little to ease investor concerns about the persistence of inflation. As the next critical juncture for U.S. inflation, President Trump has recently issued a series of letters warning trade partners that new tariffs will take effect on August 1 if no agreement is reached. These tariffs were originally scheduled to begin on July 9 but were delayed by three weeks.

The Beige Book also pointed out that from late May to early July, U.S. economic activity showed some improvement compared to the previous reporting period. Of the 12 Federal Reserve districts, five reported slight or moderate growth, five indicated stable conditions, and the remaining two experienced modest declines. In contrast, the previous report noted at least slight declines in economic activity in half of the districts.

The report mentioned the term "uncertain" or "uncertainty" a total of 63 times, a slight decrease from 80 mentions in June’s report but still at an elevated level. It emphasized that high uncertainty continues to make businesses cautious. While employment saw a slight increase, many firms plan to delay significant hiring or layoff decisions until uncertainty subsides. A few employers are increasing investments in automation and artificial intelligence to reduce the need for additional hiring.

The report also revealed that non-auto consumer spending declined in most regions, and overall activity slightly slowed. Auto sales also pulled back following a prior rush to purchase vehicles, as some households brought forward purchases in anticipation of tariffs, weakening recent sales figures.